Recessions – Is there one in our future?

Written by: Anthony Striker, MBA, Senior Wealth Manager

What You Should Know About Recessions

With inflation being higher than average and interest rates rising, you may have heard talk or seen headlines about an upcoming recession. This month, we wanted to detail what a recession is and how it can relate to your own retirement situation, along with the impact recessions have had on the economy historically.

What is a recession?

A recession is a widespread and prolonged downturn in overall economic activity. A recession is usually indicated by two or more consecutive quarters of negative Gross Domestic Product (GDP) as well as rising unemployment. However, economists at the National Bureau of Economic Research say there are no fixed rules about the measures that cause a recession. This muddies the waters on our definition a bit, but a recession usually means that individuals and businesses alike are spending less, and fewer people are working (higher unemployment).

History of Recessions

Throughout U.S. history, there have been 19 recessions. The most notable is the Great Depression which lasted from August 1929 to March 1933. During the Great Depression, the highest unemployment rate seen was 24.9% in 1933, with a downturn of GDP of almost 13% in 1932.

U.S. Recessions since 1857 have lasted an average of 17 months. However, there is a trend in shorter recessions as the six recessions since 1980 have lasted less than 10 months on average.

The latest U.S. Recession lasted from March to September of 2020 during the Coronavirus Pandemic. In just two quarters, the U.S. economy lost over 20.5 million jobs and GDP fell by more than 30%!

What does a recession mean for me and my retirement?

From the brief history we’ve shared above, it is easy to see that no two recessions are the same in duration nor severity. From a “day-to-day” perspective, a recession means that families may spend less on things like vacations and discretionary goods and services, focusing on necessities instead. It can also mean that jobs may be lost as companies experience reduced cash-flow, thus having less money to pay workers and forcing them into lay-offs. When an economy enters potential recessionary times, it is important for families to make sure they are living within their means, keeping at least 6-12 months of savings on hand, and planning for any fathomable “what ifs” that a recession could throw their way.

At Wheelhouse, we know that recessions are going to happen. Our job is to proactively put our families in the best position to withstand and live through these times and give them an opportunity to prosper even further when better economic times return. We do this through our conservative (we call it boring) approach to portfolio management, planning for the “what ifs”, and having our families know what their options and “worst case” scenarios are.

Times of economic downturn and turmoil are what we prepare for at Wheelhouse. It is important to make sure that these issues do not affect our clients’ day to day lives and long-term retirement plans. This is an example of why we typically hold a large amount of “safe money” in our portfolios. Having an asset allocation that includes a large portion of safety ensures that our clients can take from their “boring” side of their portfolio when markets are down and are able to take from both their “safe” and “at-risk” funds when the stock market is rallying. In our opinion, recessions are a common occurrence and often generate great opportunities for long-term planners and investors.

If you have any questions about what you read above, or would like a second opinion on your current portfolio or plan, feel free to reach out to our team.